As of October 2015, the insurance sector of India consists of nearly fifty insurance companies, out of which twenty five companies are involved in life insurance policies while other twenty five are non-life insurance organisations. From April 2015 to March 2016, the insurance industry has recorded the growth rate of 22.5%, which sums up to income of around Rs. 1.38 trillion. Also, the service industry accounts for 60% of the GDP. With the 7th pay commission, the insurance industry is likely to show a dramatic growth, but the question arises is that whether the implementation of GST reform will lay a positive or negative impact? The arrival of GST will significantly affect all the sectors, but out of all, it is believed that the service industry will be most affected.
The life insurance sector holds limitless potential in India, as it provides financial cover for different stages in the life of a common man. However, the influence of the insurance is terribly low and it requires a boost to broaden its coverage. Currently, the percentage of service tax on the insurance industry ranges from 1.5 to 15 based on the type of the policy. However, the burden has to be directly borne by the customer.
Under the GST tax reform, the GST Council acquires the power to decide the GST rate. The Revenue Neutral Rate report, released in December 2015 by the Chief Economic Advisor, recommends that standard GST rate should be set to 18%. Nevertheless, this number is not fixed yet, but assuming the standard rate to be 18%, the GST rate for the insurance sector may go higher than the present 15%. Considering the merging of all indirect tax, it does not appear like the GST reform would ease the weight. It would only discourage common man opting for life protection.
When it comes to the life insurance industry, the introduction of GST will bring negative change as it may cause the cost of premiums to rise. The new GST tax structure may raise the tax rate up to 18% on health insurance plans. This may cause the rise of 0.3% in an annuity and 0.75% in endowment premium for the first year. Although the taxation amount will increase with the arrival of GST, but it may reduce the total cost as the number of taxes involved may unify into one. According to the model GST tax regime, Input tax credit may not be available for life and health insurance when these services are used for personal or professional use.
The premium for term plans is expected to rise by 3 to 7%. This will highly affect the affordability of the basic insurance plans. The term plans are said to be the most affordable because there is no investment factor associated with it as they are pure risk plans. Presently, the service tax for endowment and ULIP plans are charged at a different rate. After the introduction of the GST, the service tax rate will rise to 4.50% (if GST rate is 18%) or 5.50% (if GST rate is 22%) for the first year, which is 3.75% as of now. From the second year onwards, the GST may cause the rise from 1.88% to 2.25% or 2.75% for the subsequent years.
Imposing GST on life insurance industry would be in contrast with countries like Australia, Singapore, Malaysia and Africa, where the life cover benefit is a social responsibility of the government. Adopting the regulations from these countries, India should levy zero or minimal service tax on the insurance industry, so that each and every person in the country can avail the insurance benefits. However, the government has exempted Pradhan Mantri Jeevan Jyoti policies from service tax, which has positively impacted the society. This indicates that the government is aware of the importance of insurance plans as a social security. A financially secured society can concentrate more on the progress rather than concerning about how to sustain economically. Thus, by making insurance policies cheaper, we are giving a boost to establish a financially secured country.
On input services like reinsurance policies and commission of the agents, the GST should be rendered to the account of the head department where the plan agreements happen. This would create a flawless credit chain and simplified compliance. It is recommended that an effective mechanism should be adopted for the transfer of credit collected in offices to reduce unused credits and increase the frequency of the refund process.
Though the insurance industry has grown in 2016, but currently it is facing many challenges compared to previous years. Understanding the importance of the insurance industry, we hope that government will address the issues that are currently being faced by the sector. The taxation rate or particular rules for insurance sector are not defined yet. However, the exact impact can be determined only after the GST is implemented.